We explore the opportunities and risks emanating from China’s near-zero inflation and India’s above-average consumer prices.
Defying seemingly broad sentiment that a slowdown is coming, the US economy continues to chug along, and bond yields are continuing to wake up to the monetary reality that long-term rates need to be repriced accordingly. The adjustment has been aggressive and fast. Still, there is a natural limit to these types of moves.
Modern alpha relies on multiple sources and is therefore more stable and recurring than the traditional “big bets”. For most investors, the main source of alpha is fundamental research. But to add stability it is plausible to combine fundamental research with quantitative strategies as an additional alpha source.
Amid the current rise in oil prices, global central banks have become more vigilant against inflation, becoming increasingly wary of risks occasioned by a potentially premature end to their rate hiking cycles. Consequently, we deem it prudent to be more cautious on duration. We therefore have a largely neutral view on duration for most countries in the region.
We have long been enthusiastic about the ASEAN share markets, and the region continues to offer appealing prospects. While the fundamental drivers behind ASEAN’s growth and opportunities are not entirely new, in our view the trends remain irrepressible. We discuss two key pillars—industrialisation and consumerisation—that are expected to help cement ASEAN’s place in the minds of investors.
Although the Reserve Bank of New Zealand stated in May that inflation was likely to return to its target range of 1-3% per annum if the Official Cash Rate remained at a restrictive level for some time, market expectations for interest rates have changed significantly since. At that time, rate hikes were expected to lead to rate cuts as inflation began to ease. New Zealand’s inflation has proved stickier than expected, however, as shown by the 6.0% annual rise seen in the consumers price index for the June 2023 quarter. This shows that interest rates continue to be held hostage by high inflation.
We believe that a long-term revival looms for Japan. Deflationary pressures are dissipating amid rising wages. The financial markets are headed for a resurgence, supported by robust stocks—which could benefit further from a re-allocation of the country’s vast household savings—and BOJ monetary policy headed towards normalisation after decades of unorthodox easing.
This month we discuss the timing of Japan’s savings to investments push as assets held by households hit a record high; we also look at the rise in the domestic long-term yield to a 10-year peak and assess its potential impact on the equity and credit markets.
New Zealand equities continued to see weakness in September, with the market falling by approximately 3%. This partly reflected broader volatility given that the Australian market declined by about 4% and US equities saw a fall of approximately 5%. More notably on a domestic level, however, the market’s direction was affected by the key August round of corporate results. The August reporting season is the most significant for New Zealand given that many companies release their full-year results and some firms with December fiscal year-ends release their half-year results during the month.
With oil markets closing in on US dollar (USD) 100 per barrel and US bond yields reaching 16-year highs, one could be excused for being struck by a bout of conservatism. With valuation dispersions again back to all-time highs, we contend that the risk-reward looks more favourable when taking a long-term view of Asia.